Wednesday, February 24, 2010

Coase Elections

I have become frustrated by government and believe it is badly in need of fixing. This puts me in agreement with about 300 million other Americans. A common complaint is that special interests and lobbyists have too much influence over policy. This complaint only grew in intensity after the Supreme Court ruled in Citizens United vs. FEC that corporations and other entities have the right to fund political activities as free speech. The decision has been openly criticized by the President in the State of the Union address and has been mocked in Congress as leading to the Senator from Exxon. I disagree with the argument that this ruling means that corporations will be able to do whatever they want. Lobbyists tend to fund candidates on both sides of the aisle and there are lobbyists on both sides of any issue. I don’t think that the new ruling will change the type of legislation that government passes (or doesn’t pass), I just think that more money will be wasted by both sides in “rent seeking” activities, and any time money goes to unproductive resources, society is left worse off. A better solution, I believe, is to redirect the resources used for rent seeking. Under the current system, lobbyists on both sides of an issue spend millions to get legislation passed (or to stop legislation from being passed) or to get a candidate elected. Any money spent on Lobbying is wasted if you don’t get the outcome you wanted (for example, if the other side spends more and gets the outcome that they wanted). The way to reduce the amount of money wasted is for the two sides to decide among themselves which side is willing to pay more for a particular outcome and then for them to pay off the other side. This is the idea behind the Coase Theorem that basically states that under certain conditions, the outcome will go to the party that places the greatest value on the outcome. Suppose two neighbors are arguing about a tree on their property line. One neighbor want to chop it down and the other guy wants to keep it. They decide to go to court to decide who has the rights over the tree. Coase argues that there is no need to go to the courts; the easier method would be to determine which neighbor places a greater value on the outcome. If one neighbor is willing to pay $20 to chop it down, but the other person is willing to pay $25 to keep it, then the second person should pay the first person at least $20, but no more than $25, in order to keep the tree. Both sides are now better off.What if we used the Coase theory to decide political outcomes? Participants on both sides of an issue raise money and whichever side raises the most money wins, but has to turn at least some of the money over to the losing side. The easiest way to see this is an election. Candidate A is a favorite of business and raises $1,000,000 while Candidate B is a favorite of unions and raises $900,000. Candidate A would win the election, but the people who contributed would have to pay $1,000,000. The people who donated to candidate B get to keep their pledge plus they double their money because they get paid out of the money that Candidate A raised. The extra $100,000 goes to the government.Just to be clear, not only does the losing side get their own money back, they double their money. Instead of being a system where the “rich” are allowed to buy an election,the Coase election is really a huge means of wealth redistribution from the rich and powerful to the poor and powerless. Instead of keeping power by "buying" politicians, they have to give the money to the people. Also, each candidate would really have two accounts. One account would be used for campaign activities such as commercials, signs, and fund raising. As a donor/lobbyist, you can contribute to this fund, but you won’t get that money back - any money spent on that is lost. This fund is the same campaign fund that candidates currently have. The other fund is a new fund that determines who wins or loses the election. Whichever candidate raises the most money for this new fund wins. There is no actual election where people go vote. The way you vote is by contributing to the fund. Not only must you decide who you want to win, you must decide how much you are willing to pay to get him elected. Any entity could participate in this, including corporations and speculators would also participate. I may not care who wins, but I may contribute $50 to the candidate that I expect to lose. If I’m right and that candidate loses, then I double my money. If my candidate wins, then I lose my $50. Is this a great idea? Yes. Will it happen? No. Why? Congress. Let’s look at the current system for deciding these matters. People vote to elect Congress, lobbyists from both sides shower congress with favors. Congress does nothing. Repeat. With 90%+ of congress reelected each time, why would they support a system that takes away their influence and the barrage of favors that comes with it? There are also some practical limitations to the Coase theorem. This type of election requires a fairly clear dispute between two sides. As you add more and more possible outcomes, it becomes impossible for both sides to win. However, you could have a series of votes between outcomes until you have a final winner – sort of like November Madness.

About Me

Hi, I'm Dr. Mark A. Swanstrom, CFA and this is my blog. This blog includes essays on current economic, political, and financial issues or whatever else I might be thinking about. I also post parts of the book I'm working on, Kinky Economics. I try to post items twice a week. Please feel free to comment and assist me on this undertaking.